Tweaking contract law to boost business index

Last week, it was reported that the government is shortly going to make changes in the Contract Act and the Specific Relief Act, so as to make enforcement of contracts in India less painful. Given the confidence India has got recently by the quantum jump taken in the Doing Business Index ranking by 30 notches, it is heartening to know that the government is really focusing its attention on one of the most serious problems where India has always fared badly – badly is unarguably a very mild term – by being as low as 170 and odd places in the Doing Business Index on this parameter for many years.

It has usually been the stand of most of the foreign investors that contracts in India are not given due respect, and hence whatever is written on a piece of paper signed by both the parties and termed as contract should not be given as much importance and seriousness in India as given in most of the developed world. Contracts are supposed to be sacrosanct with only rare exceptions and circumstances allowing the parties to deviate from the mutually agreed terms.

The contract law in India is of 1872, and can be said to be one of the finest laws drafted and enforced in India. It is nobody’s case that because the law is so old it should be discarded. The black letter law is sound, however, with the passage of time and numerous interpretations being given to different sections and subsections of the law, the intention of the legislature – though British at that time – might have been overlooked, or, at least not fully followed in spirit. Coupled with the growth of administrative law and the role of a welfare state, the contract law in the country has often been treated as something malleable and ductile, and, as a result, the contracts have been usually treated as something pregnable, typically on the grounds of public interest.

The judiciary has been quite agile for the last four decades in making contracts – especially public works contracts – porous, thereby on several occasions, defeating the very purpose of drafting a foolproof contract with stated compensation plans, exit and dispute resolution clauses, jurisdiction, choice of law, indemnity, bank guarantee and performance parameters.

Given a choice between strict enforcement of a contract on legality and on the other hand, bringing elements of public interest and policy, courts in India have been shifting their stand towards bringing their own understanding in the form of discretionary power, making contracting parties feel that they are at the mercy of the judicial pronouncements. This has not only happened with private companies and individuals in their personal capacities, even public sector and government have been occasionally baffled by the interpretations given to contractual clauses.

Making the black letter law tighter, so as not to leave things ambiguous, will go a long way in creating a better legal environment by bringing in certainty and predictability in business relationships. Focusing more on specific performance of contracts, rather than simply awarding of damages – compensation – will also be a good step, however, in many cases, specific performance may not be possible, or even desirable, after the lapse of a certain period. It has been observed in infrastructure cases, in particular, that there is usually very high time and cost overrun, which make specific performance infructuous. Often the cost involved with the project goes up by more than 10 times or higher, which is really a burden on the public at large.

Still, specific performance within a reasonable period of time is always welcome as all the contracts are not time bound, or, it can easily be said that all the contracts do not become redundant after a certain period of time. Making changes in the black letter law will send the right signal and convey to the concerned audience the seriousness of the country in making things work the right way.